CalPERS backs increased legislation for placement agents

If passed, the new guidelines would require placement agents to register with the state and disclose compensation and activities on a quarterly basis. Agents would also be prohibited from receiving any compensation that is contingent on the outcome of an investment action.

“We need strong measures to make sure that placement agents who contact pension fund officials are subject to appropriate oversight. Reporting and ethics rules for lobbyists who try to influence public policymakers will work effectively as well for placement agents,” said Rob Feckner, CalPERS board president.

Agents would also be prevented from making campaign contributions and be required to attend an ethics class every two years.

The announcement follows the creation of a placement agent disclosure policy by the fund in May, requiring investment partners and external managers to disclose their retention of placement agents, the fees they pay them, and the activities performed.  Agents are also required to register as broker-dealers with the US Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA), or else CalPERS says that it will decline to retain or invest in the external manager or investment vehicle.

CalPERS’ call for heightened regulation of placement agents has come while the New York Common Retirement Fund ‘pay to play’ scandal is still ongoing in New York courts, which involved certain private equity firm representatives paying hundreds of thousands of dollars in bogus finders fees in exchange for investment from the pension fund.

CalPERS felt the shockwaves of the scandal directly, when Elliot Broidy, chairman of US and Israel-focused private equity firm Markstone Capital, resigned after admitting paying $1m to officials at the New York pension fund in exchange for a $250m commitment. CalPERS had invested $50m in a Markstone fund in 2004, and is said to be reviewing its relationship with the firm.

George Diehr, CalPERS investment committee chair, said, “This legislative proposal goes to the heart of recent investigative and enforcement activities in New York that have raised questions about shadowy involvements by placement agents in public pension plan investments, the fees that they receive from the firms that hire them and the services they provide for those fees.”

CalPERS provides retirement benefits to over 1.6 million public employees, and has $200bn in market assets. The fund reportedly reduced its private equity funding by 62 per cent in the first seven months of the year.

Copyright © 2009 AltAssets